Student residences: Time for a partnership approach?
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
©2019. This manuscript version is made available under the CC-BY-NC 4.0
license http://creativecommons.org/licenses/by-nc/4.0/
Student residences: Time for a partnership approach?
Laura McCann1, Norman Hutchison1, Alastair Adair2
1
University of Aberdeen Business School, Aberdeen, Scotland. UK
2
Ulster University, Belfast, Northern Ireland. UK
Abstract
Purpose
Recent years have witnessed significant increases in the number of undergraduate students
entering UK higher education. This increase is a result of the removal of the sector-wide
cap on student numbers in England and Wales, along with growth in overseas students
attracted by the reputation of UK universities and the weakening of the value of Sterling.
Adopting a corporate real estate perspective, the aim of this paper is to understand how the
UK student residence market is structured and financed, and to identify the motivations that
are driving the strategies adopted by the universities, private sector providers and investors
in this market. In doing so, this research seeks to test the appropriateness of the Gibler and
Lindholm (2012) model of corporate real estate strategy in the UK higher education sector.
Design/methodology/approach
Data was gathered from a survey of UK university secretaries, combined with interviews
of private sector providers, bank lenders and the analysis of secondary data on investment
flows into Purpose Built Residential Accommodation (PBSA).
Findings
UK university real estate strategy is mainly one of outsourcing student accommodation to
reduce costs as well as employing modern purpose-built student housing as a marketing
tool and brand enhancer. This strategy is also used as a risk mitigatory tool enabling
universities to adjust to changing student demands. Revisions to the Gibler and Lindholm
(2012) model are proposed to reflect the reality of the real estate strategy adopted by the
universities. Private sector providers view the sector favourably and are set to be the main
providers of new supply over the next decade, entering into strong partnerships with the
universities. While there is evidence of some oversupply of bed spaces in certain cities,
well located developments are viewed as an attractive lending opportunity. Since 2013
there has been significant growth in institutional investment into UK student
accommodation, albeit sentiment is currently tempered by political uncertainty.
Practical Implications
The role of PBSA designed to meet modern student requirements is playing a critical role
not only in attracting, recruiting and retaining students, but also enhancing the overall
higher education experience promoting student welfare and wellbeing.
12
Originality/Value
The corporate real estate strategy adopted by the UK higher education sector is an under
researched area. This paper focuses on the strategy surrounding student accommodation
provision and reports on the findings of an extensive survey of the key players in this sector.
The results are of value to all stakeholders including government and regulators, at a time
when higher education is facing substantial challenges. The evidence of a growing
partnership between universities and the private sector is viewed as a logical solution, both
for the present and the foreseeable future.
Key words: Student accommodation; real estate strategy; outsourcing; university funding;
Higher Education sector; private sector providers
31. Introduction
UK universities have recruited an increasing number of students in recent years. Between 2010
and 2016, Higher Education Policy Institute (HEPI) data indicated there had been a 5.5 percent
increase in undergraduate numbers driven primarily by the removal of the cap on student
numbers introduced in 2015/2016 and partly down to demographical factors. The recruitment
of non-UK students has similarly increased not only due to the removal of the student cap, but
because of the weak value of Sterling in recent years which has made study in the UK attractive
to non-UK nationals, and at present almost 25% of students studying at UK universities come
from a non-UK background. Combined, the increase in students studying away from home has
triggered an increase in the number of students requiring accommodation during their studies
with 27.49% of students staying in purpose-built student accommodation (PBSA) in 2017/18.
While across the UK there is presently a dip in the number of 18 year olds in the period to
2022, the trend of increasing student numbers is expected to continue over the next decade with
the HEPI (2018) predicting growth in the region of 300,000 to 2030 prompting the need for
investment in student accommodation to house the increasing number of students.
Whilst there has been an increase in students requiring accommodation in recent years and an
increase expected in the future, this coincides with a time of reduced government funding in
universities and uncertainty regarding tuition fee income for English universities following the
recommendation in 2019 by the Augar Review1 to cut tuition fees for undergraduate students
from £9,250 to £7,500 per annum, with overall university sector income protected by an
increased government contribution to teaching costs. While it may be argued that rather than
invest in student accommodation directly, universities may wish to divest their accommodation
provision to a third party to allow them to concentrate on investing in core educational
activities, there is a strong counter argument that the provision of enhanced student
life/wellbeing concept facilities, including attractive and affordable student accommodation is
a major recruitment factor for universities. Indeed, according to the National Union of Students
(NUS, 2018), almost half of students stated that their choice of university was influenced by
the accommodation offered. Moreover, the 2018-19 Knight Frank student accommodation
survey of students indicated that 70% of first year students opted to stay in either university or
private sector run PBSA, which indicates the importance of this type of accommodation as a
recruitment factor. PBSA is particularly attractive for first year undergraduate students as the
influence of university provided PBSA has been found to lead to broader student outcomes as
students enjoy enhanced social, cultural and extra-curricular involvement in their studies
(Bliming, 1993), by means of being surrounded by similar people (age / first time away from
home / studying) and the opportunity to create strong friendships. A major selling point of
student accommodation is that students who stay in residence halls performed better in their
studies, receiving higher average GPAs than students who did not stay in residence halls
(Hountras and Brandt, 2015).
Student accommodation is attractive to students as it generates an all-in lifestyle in terms of
location (accommodation being close to the university which is heralded as the most important
factor in a student’s choice of accommodation according to a survey of students by Knight
Frank in 2019) and cost as accommodation fees typically include all bills such as gas, electricity
and internet. However, the ageing stock of student accommodation owned by universities
means that they need to invest in their current stock to maintain standards and to make it
1
Review of post-18 Education and Funding (2019), HMSO.
4attractive to new students, and to be viewed as attractive as competitor PBSA provided by the
private sector (Savills, 2018). The student population is no longer simply looking for lodgings
which only meet basic requirements, but are looking for a higher level of service and facilities.
Whilst, location and cost, together with security, continue to be fundamental in the
consideration of student accommodation, the 2018/19 Knight Frank survey indicated that for
at least 9 out of 10 students, fast Wi-Fi, leisure facilities such as an on-site gymnasium, the size
of the room and the quality of the accommodation and it’s furnishings were an important factor
when deciding on where to live. The importance of competitive advantage in the university
sector will be discussed further in section 2 below.
Table 1 illustrates the term time accommodation chosen by students between 2014 and 2018.
Approximately 60% of students stayed in rented accommodation, less than half of whom stayed
in PBSA and the other half in other rented accommodation. In terms of PBSA, the majority of
students resided in university-maintained property but there was an increase in the percentage
of students staying in private sector halls between 2014 and 2018.
Table 1: Accommodation Preferences: 2014-2018
The table reports the distribution of term time student residences. Panel A presents the type of
accommodation. Panel B presents a differentiation between PBSA and non-PBSA accommodation and
Panel C differentiates between rented and non-rented accommodation.
2014/15 2015/16 2016/17 2017/18
Panel A: Type of accommodation
University maintained property 19.43% 19.31% 19.43% 19.32%
Private-sector halls 6.95% 7.63% 7.85% 8.17%
Other rented accommodation 30.68% 30.47% 29.81% 28.83%
Parental/guardian home 19.29% 18.88% 18.80% 19.27%
Own residence 15.24% 15.48% 16.73% 17.20%
Other 3.26% 3.73% 3.44% 3.68%
Not in attendance at the provider 1.43% 1.39% 1.40% 1.35%
Not known 3.72% 3.12% 2.53% 2.19%
Total 100.00% 100.00% 100.00% 100.00%
Panel B: PBSA versus non PBSA
PBSA 26.38% 26.94% 27.28% 27.49%
Non-PBSA 68.47% 68.56% 68.78% 68.98%
Alternatives 5.15% 4.51% 3.93% 3.54%
Total 100.00% 100.00% 100.00% 100.00%
Panel C: Rented accommodation versus non-rented accommodation
Rented accommodation 57.06% 57.41% 57.09% 56.32%
Non-rented accommodation 37.79% 38.09% 38.97% 40.15%
Alternatives 5.15% 4.51% 3.93% 3.54%
Total 100.00% 100.00% 100.00% 100.00%
(Source: HESA, 2018)
Cushman and Wakefield (2018) examined the PBSA market in further depth. They reported
that whilst it might seem that universities provided over half (53%) of beds, in fact the private
sector supplied more than half of the beds if joint venture beds were classed as private sector
beds. This trend of the private sector supplying most of the beds is set to continue. As the
number of students increases and provision of private sector halls increases, the proportion of
students staying in private sector halls will increase. Cushman and Wakefield (2018) found that
5in 2018/19, 31,348 new beds were provided by the PBSA market which was the biggest
increase in new beds in one academic year. Of the 31,348 new beds, 77% or approximately
24,000 beds were provided by the private sector.
Whilst student numbers after 2022 are expected to rise across the board over the next decade,
10% of universities (a mixture of both Russell Group and post 1992 institutions who are ranked
in the top 50) accounted for just over 40% of growth in student numbers highlighting that not
all universities are benefitting from the removal of the sector-wide student number cap in
England and Wales, while noting the difference in policy in Scotland. (Cushman and
Wakefield, 2018). Indeed, reflective of students having the opportunity to ‘opt up’ to a higher
ranked university, five low ranked universities have found that their student numbers have
fallen by 25%. As a result, some universities have become less attractive for PBSA investment.
From a corporate real estate perspective, the aim of this paper is to understand how the UK
student residence market is structured and financed and to consider the risk and return
characteristics of the differing offerings from the standpoint of the university, the private
provider and the investment market. The remainder of this paper is structured as follows.
Section 2 considers corporate real estate strategy and discusses the different partnership and
ownership models that exist in the PBSA sector in the UK. Section 3 reviews the investment
flows in PBSA, while the research design is discussed in detail in Section 4. Section 5 analyses
the data and discusses the survey results and interview findings. Finally, Section 6 provides a
summary and presents conclusions from the research.
2. Literature review
2.1 Corporate Real Estate Strategy
As discussed above, UK universities operate in a very competitive global market, with the
sector currently facing significant financial challenges, most notable because of the prospect
of a cut in undergraduate fee income combined with the uncertainty of existence in a post Brexit
UK (McCann et al., 2019). For most universities, growth in revenue and profitability is very
dependent on rising student numbers, both undergraduate and postgraduate. In order to grow
student numbers, universities are required to offer an attractive overall ‘package’ - a strong
academic offering, housed in a well-resourced campus with modern student residential
accommodation located on campus or nearby. Given the central role of real estate in supporting
this overall strategic aim of the university, it is essential that management of the university
estate adopts a strategic approach. Corporate real estate (CRE) is a physical, financial and
operational resource which requires close monitoring (Heywood and Kenley, 2008 and Nourse
and Roulac, 1993). Universities can use their CRE to create and sustain a competitive
advantage, most particularly in the context of this research, by providing better student
residences in an efficient and effective manner.
Utilising a competitive advantage framework to consider the strategic management of CRE has
its origins in the work of Porter (1980) and has been adopted among others by Nourse and
Roulac (1993), Lindholm et al (2006), Gibler and Lindholm (2012) and Nase and Arkesteijn
(2018).
Nourse and Roulac (1993) list eight alternative real estate strategies which a business can
choose: 1) occupancy cost minimisation, 2) flexibility, 3) promote HR objectives, 4) promote
6marketing message, 5) promote sales and selling process, 6) facilitate and control production,
operations and service delivery, 7) facilitate managerial process and knowledge work, 8)
capture the real estate value creation of business. It is hypothesised that when considering
provision of student residences numbers 1, 2, 4 and 5 are likely to be the most directly relevant.
Lindholm et al., (2006) develop a model that translates business strategies into corporate real
estate strategies making a distinction between two distinct business strategies for increasing
shareholders wealth: revenue growth or profitability. Neither Nourse and Roulac (1993) nor
Lindholm et al (2006) empirically test their models but this is taken up by Gibler and Lindholm
(2012), who in a survey of practitioners calibrate and substantiate the model created by
Lindholm et al (2006) while also making revisions by adding in environmental sustainability
as a strategic aim. This revised model is shown in Figure 1 below. Interestingly, reducing real
estate related costs was the most common strategy adopted by the respondents and the benefits
of shorter lease terms was highlighted as an important tool to enable the organisation to adjust
to the changing business strategy, a point that will be considered in more detail in section 5.
Figure 1. Revised model of relationship of corporate real estate strategies to core business
strategy.
Source: Gibler and Lindholm, (2012).
In evaluating this model from a corporate real estate perspective, this research will consider
whether the current strategy of UK universities in the provision of student residences is either
a revenue growth strategy or a profitability growth strategy, or as appears a possibility a more
student experience based approach, in which case the model will require refinement to reflect
the needs of the university sector. Reducing real estate related costs and flexibility are shown
as part of the strategies to support profitability growth, while promoting marketing, sales and
organisational brand forms part of the strategy for revenue growth. The growth in private sector
provision of student residences might well allow universities to enjoy a ‘win-win’, with
increased revenue being combined with a reduction in costs and greater flexibility from both a
physical and financial perspective. While it may seem a contradiction to believe that you can
lower costs and improve services, outsourcing student residences to private sector providers
7may achieve this aim, both in the short and long term, as for example staffing costs may be
cheaper for the private sector who are able to avoid public sector pensions and pay scales. That
said, universities need to recognise that there are agency costs and additional risks in
outsourcing, such as appropriate staffing levels of core corporate real estate staff and
reputational risk of non-performance of the third-party provider (Gibler and Black, 2004).
In utilising this model as a framework to analyse university strategy, the overall objective of
‘maximising the wealth of shareholders’ as presented in the Gibler and Lindholm (2012) model
needs to be replaced for the university sector, by a goal based around a sustainable financial
objective allowing for an adequate level of reinvestment, given the predominance of charitable
status in the sector. The Office for Students regulates higher education providers in England
and the registration and ongoing monitoring process requires higher education institutions to
demonstrate they are financially viable and sustainable. Key financial sustainability indicators
comprise surplus/deficit as a percentage of total income, net operating cash flow as a
percentage of total income, borrowing as a percentage of income, net liquidity in terms of
number of days and total assets, and net total assets as a percentage of total income (Office for
Students, 2019).
McCann et al (2019) found that since the global financial crisis in 2008, universities have been
forced to look at alternative sources of finance due to the unwillingness of banks to lend for
periods beyond 5 to 10 years. Given that PBSA developments are large and require long term
financing, this has resulted in universities exploring different ways to provide and finance
student accommodation. We explore the different models of supply of PBSA in section 2.2.
2.2 Models of supply of PBSA
Figure 2 illustrates the different suppliers of PBSA, ranging from university owned and
operated through to university-private partnerships and direct lets from third party providers.
In this section we discuss the characteristics of these in turn.
Figure 2: Suppliers of PBSA
University University- Third party
owned and Private providers
operated Partnership
University owned and operated
Universities have historically been the major players in the PBSA market having been heavily
involved in the supply and operation of student accommodation for a number of decades,
particularly since the 1960s and the growth in the availability of Higher Education.
Traditionally, universities owned, operated and funded student residences (which are located
on or very close to the university campus) using an on-balance sheet approach out of internally
generated funds or debt finance and have viewed the supply of accommodation as a commercial
let with a view to generating income. This owner-operator approach to student residences
affords universities with the highest level of control over the accommodation and service that
they provide. However, in a capital constrained context, university core expenditure tends to
8be focused on teaching and research and providing bed spaces is not viewed as a priority when
universities have often hit their debt ceiling (Harper Planning, 2018). Consequently, over the
last decade or so, some UK universities have sought to move away from this owner-operator
approach and have been outsourcing the capital cost and management of PBSA to the private
sector (third-party providers) or university-private partnerships.
University-private partnerships
Over the last decade, universities have added very little new stock of beds and the growth in
supply of beds has come from the private sector and this pattern is expected to continue over
the next few years (Cushman and Wakefield, 2018). These university-private partnerships
allow universities to move the financing of student residences off-balance sheet and limit a
university’s long-term exposure to financial and operating risk, allowing them to focus on core
educational activities.
At present, university-private partnerships are common and these can take 3 forms:
i. Design, Build, Operate and Finance (DBFO) partnerships - a university provides land
and outsources the financing, building and operation of the residences, looking for a
capital receipt from the residences in the future. The operating company enters into a
nomination agreement with the university to rent out their rooms.
ii. Stock transfer partnerships – a university transfers part or all of its residence stock to a
private company on a long-term reversionary lease.
iii. Private company takes over existing campus developments and runs them on behalf of
a university.
Often in partnership form ii) and iii) the private sector refurbishes the residences.
The most popular form of university-private partnerships in the UK Higher Education sector
at present are DBFOs, which are essentially consortium deals where several parties collectively
work together to provide student accommodation and currently account for approximately
43,000 or 17% of all beds in the PBSA sector, with £2.4bn having been invested in such
partnerships (JLL, 2018). DBFO agreements can be on-campus developments where the
university provides the land for the student residences on university owned land, or off-campus
where a private company finds land which is usually located either close to a university campus
or in a city centre location.
DBFO transactions are complex and there are many variations of such a deal. The basic
structure of a DBFO deal built on-campus is outlined below.
1. A university leases land to a contractor who has been appointed by the university to
design, build, finance and operate the student residences for a period of time. The
contractor can either be a single company or a consortium of companies who have
created a special purpose vehicle. In return, the university may receive a capital receipt
from the contractor, if the project model generates a premium.
2. The contractor (or special purpose vehicle) will finance, build, maintain and operate the
student residences, and also retain the income generated by the student residences over
the lease period.
3. The university has the right, but not obligation, to enter into a nominations agreement
9with the contractor to provide a stream of student customers for the student residence.
A nomination agreement is an agreement between a university and a service provider
where the university agrees to fill a certain number of beds per year for a specified
period of time at an agreed rental rate. Nomination agreements can range from 1 year
to multiple year periods.
4. At the end of the lease period, the freehold interest in the student residence reverts back
to the university.
The contractor who leases the land from the university bears the risk for the costs, design,
construction, operation and maintenance of the project. The university is only liable for filling
those rooms it has nominated for that year.
To ensure that DBFO projects are kept off-balance sheet via a service concession arrangement
in line with accounting standard FRS 102, a university’s contract with the service provider will
generally be based on a soft-nomination agreement. A soft nomination agreement is a rolling
one-year agreement where universities have the right, but not obligation, to nominate either an
undefined or agreed number of rooms per academic year.2 The presence of a hard nomination
agreement – which is a longer term agreement where universities agree to nominate an agreed
number of rooms per academic year - could place the liabilities of a DBFO contract onto a
university balance sheet.
Private sector providers
Private sector providers such as Unite and Campus Living Villages are further suppliers of
PBSA. These companies own, invest in and develop freehold student accommodation and
directly let rooms to students over the academic year. They bear the risks of construction,
letting, maintenance and repair. Private sector providers typically invest in university cities,
both in the city centre and close to campuses, so that they can capture demand from multiple
universities in one location (Unite, 2018; Harper Planning, 2018). These companies enjoy the
highest return of all types of PBSA as they have flexibility on rent price (which differs
depending on demand and land prices in the location of the university), and benefit from any
increase in value of the underlying property asset.
Whilst private sector providers directly let rooms to students, it is not uncommon for them to
enter into nomination agreements with universities who agree to lease a certain number of beds
per academic year. These nomination agreements are classified as operating leases and can last
for one year or for multiple years. At present, operating leases are off-balance sheet to the
university but proposed changes to FRS 102 stipulate that moving forwards, new nomination
agreements that universities enter into will be on-balance sheet.3 Where the nomination
agreements are for multiple years, rent price is agreed between the university and the third-
party provider at the start of the agreement, and any future increases in rent is indexed by RPI.
Alternative uses of PBSA
Rental contracts prevalent in the PBSA market range from 38 week to 51 week per annum
leases. The upshot of this is that many rooms in the sector are empty for approximately 25%
of a calendar year. To prevent underuse of their assets, suppliers of PBSA attempt to lease their
2 A service concession arrangement is defined as a contract between a public sector body or public benefit entity (the university)
and a private operator to develop (or upgrade), operate and maintain infrastructure assets.
3
Existing nomination agreements between universities and private service providers will remain off-balance
sheet.
10rooms during the summer months to increase revenue, and in the case of university owned and
operated residences the extra revenue helps to subsidise student rates.
The pros and cons of outsourcing
Brandes, Lilliecreutz and Brege (1996) suggest that there are three main reasons why a firm
would choose to outsource: to focus on core competencies; cost efficiency/effectiveness and
service. They suggest that there is a need for all firms to solely focus on their main business
practice and specialise in that in order to create a competitive advantage over competitors. The
clear benefit of outsourcing the supply of student accommodation from university owned and
operated to both university-private partnerships and private sector providers is that it allows
universities to free up their resources and to concentrate on their core educational activities,
whilst leaving the supply of accommodation to real estate specialists (Elmuti et al (1998)).
However, universities lose control over the quality of services that are provided to the students.
With student satisfaction being an important component of the TEF rankings there is evidently
a degree of risk inherent in the decision to outsource student accommodation. For example, in
an on-campus DBFO agreement where the student accommodation is marketed as being
provided by the university, the university will indirectly assume liability for the actions of the
outsource service provider by means of low student satisfaction, if the quality of the
accommodation is sub-standard. Moreover, universities lose the capacity to profit from student
accommodation if they outsource (Moran and Taylor (1998)). The growth of outsourcing has
facilitated growth in PBSA investment and this is discussed in the next section.
3. Investment Capital Flows into PBSA
The significant growth of investment into UK student accommodation as evidenced by a 178%
increase in the value of such assets from £6bn in 2013 to £17bn in 2017 (IPF, 2018) is mirrored
at the global level where investment into PBSA has grown each year to 2018.
Real Capital Analytics research into global real estate investment flows indicates that over the
five-year period between June 2014 and June 2019, a total of £25.68bn was invested in purpose
built student accommodation with the UK a major focus, accounting for £10.21bn or almost
40% of the total investment. Within the UK, England captures the major share of investment
(£10.10bn, 98%) with the Greater London the principal focus (£8.56bn, 84% of total UK
investment). In contrast, Scotland (1.2%), Northern Ireland (0.4%) and Wales (0.4%) received
significantly lower levels of investment. Most investment since 2013 has come from overseas,
primarily from the US (£3bn) and from Asia (£2.2bn) (Savills, 2019b).
Investor demand for PBSA at global and local level, together with quantitative easing and low
interest rates have driven the transformation from a niche to a distinct mainstream asset class
characterised by a wave of investment into new building in the UK resulting in a hardening of
yields at 5.5% and a narrowing spread to gilts at 4.0% (Savills UK, 2018). Newell and Marzuki
(2018) identify key global investors in PBSA as GIC, CPPIB, APG, Bouwinvest, PGGM and
Temasek. These investors often invest in student accommodation across several countries. The
principal investors in the UK PBSA market are Wellcome Trust, IQ Student Accommodation,
Empiric Student Property, GCP Student Living, all of which are based in London, and Unite
Students REIT located in Bristol (Real Capital Analytics). In addition, many property fund
managers are actively investing in student accommodation in both listed and non-listed vehicle
structures. For example, Principal, Mapletree, Aberdeen and Hines, as well as US and UK
student accommodation REITs have been established. In this regard, they identified over 35
major players with student accommodation in their funds.
11The increased investment into PBSA has been facilitated by the emergence of highly
professional operators of student accommodation with sophisticated operating platforms in
recent years to supplement property fund manager and institutional investor activity. These
include UNITE, Liberty Living, CRM students, Fresh Student Living, Housing for Students,
Campus Living Villages, Sanctuary Student Housing, UPP, 360 Developments and Vero
Living (Newell and Marzuki, 2018).
The dramatic growth in the student residential sector has raised the spectre of oversupply
following a building boom across a number of UK cities. The rapid explosion in student
numbers has been followed by a frenzy of construction activity resulting in an education-
themed real estate sector providing accommodation for circa 600,000 people, equivalent to one
third of the student population and currently estimated to be worth £50bn. Some investors have
expressed concern that university towns are now overbuilt and that such investment is
distorting local economies and housing allocation when there is a significant need for social
and family homes. (Financial Times, 2019).
The risk of oversupply producing a decline in investor demand is evidenced by the investment
trend which in the UK showed a lending high in 2015 and has been declining since, with the
2017 figure of £3.1bn being 45% less than the peak (Savills, 2018). While there is a long-term
rising trend of global student residence investment since 2007 (Knight Frank, 2018), local
markets such as the UK may be showing early signs of the first identifiable cycle in PBSA.
Without a longer-time series of PBSA investment data it is not possible to confirm if this asset
class will follow prime market cyclical patterns (Goodchild, 2017).
Currently, a wider range of risks are influencing investor appetites in the UK including political
uncertainty, Brexit, immigration and demographic factors. Brexit and possible changes to
immigration in particular are producing an uncertain future for international students especially
regarding future fee levels. With many UK universities specifically promoting PBSA for
international applicants, uncertainty mounts regarding future student housing cash flows.
Demographic factors relate to the decline in UK student age population which from 2022 is
expected to return to growth in particular for those locations which are best able to offer flexible
accommodation and amenities that future generations of students may require (Savills, 2018).
4.0 Research Methods
Design
To examine the factors that affect the provision of student accommodation, we surveyed
university secretaries in the summer of 2019. We also conducted a number of informal
meetings with our home university secretaries and directors of estates. As the private sector is
also heavily involved in the provision of student accommodation, we conducted interviews
with four active private sector providers.
We supplemented our survey approach by interviewing three other parties in the spring and
summer of 2019. First, we interviewed two major banks which have considerable experience
in lending to the Higher Education sector. Second, we interviewed an independent corporate
finance adviser who specialises on the Higher Education sector and third we interviewed a
student communication specialist who has advised universities (and leading providers of
private sector student accommodation) on student preferences regarding student
accommodation. We discuss each approach in turn.
12University surveys
Our survey focused on how universities provide student accommodation and the issues of
supply and demand surrounding the provision of such accommodation both in the past and
looking towards the future. We surveyed university secretaries from all UK universities during
the autumn of 2019.4,5 We used two methods to deliver the survey. First, we posted a hard copy
of the survey to each university secretary. We requested that the surveys be returned to us
within 3 weeks using a provided stamped addressed envelope. To encourage responses after
this 3 week period ended, we then sent an online version of the survey to each university
secretary by email asking them to respond within 2 weeks. We received 66 survey responses
in total, representing 41.77% of the population.6,7
Private sector provider interviews
As the percentage of students staying in private sector halls continues to increase, it is important
to understand the issues surrounding the supply of student accommodation from the perspective
of such providers. Therefore, during 2019, we conducted face to face and telephone interviews
with four major providers of private sector student accommodation: Unite, Student Roost, GSA
and Sanctuary Housing.
Bank/Debt Finance Providers
To gauge the current appetite for lending to providers and developers of student residences,
interviews were conducted with two major UK banks. A telephone interview was held with
Barclay’s Bank involving senior staff in university, education and real estate lending. In
addition, a written response to interview questions was received from Bank of Ireland corporate
and real estate lending. Both responses addressed current issues of lending into the sector,
management of risks and perceptions of future prospects.
5.0 Analysis of results
(i) Survey of UK universities
In total 66 survey responses were returned, representing 41.77% of the population, which
compares very favourably to the response rate of 16% that McCann et al (2019) obtained in a
recent survey of Finance Directors from all UK universities during the summer of 2018. Of the
responses, 16.67% of responses were in hard copy format and 83.33% in an online format.
More than three quarters of the respondents (51) were universities based in England, 12
respondents were universities based in Scotland, 2 from Northern Ireland and 1 from Wales.
12 (18.18%) respondents were Russell Group universities, and 38 (57.58%) respondents were
post-92 universities indicating a mix of responses from different groups of universities. Of the
66 respondents, 4 universities were not involved either directly or indirectly with the supply of
student accommodation and did not proceed with the survey. Our survey results are presented
in Tables 2 to 5, and in Figure 3.
4
To ensure our survey was apposite, we conducted a pilot study amongst the authors’ home universities and edited
it as required prior to sending it out to universities.
5
Whilst the survey was sent to university secretaries, in many cases the survey was passed onto directors of
estates, heads of accommodation services and other equivalents to fill in on their behalf.
6
Of the 66 responses, we received 11 hard copy responses (16.67%) and 55 online responses (83.33%).
7
Sending an online version of the survey to university secretaries was planned in advance and designed to
maximise the response rate.
13Respondents were questioned on the main motivations for being involved in the market for
student residences. The fundamental motivation was that universities recognise the key role
that student accommodation plays as a core function of a university in the overall student
experience in terms of student welfare and wellbeing, but also importantly in student
recruitment and student retention. Unsurprisingly, income generation was also a key
motivation with a number of respondents noting that the provision of student residences was
used to deliver a surplus back to the university to allow it to invest in the upkeep of existing,
and provision of new, strategic initiatives, services and facilities on campus for the students.
Indeed, two-thirds of universities lease their student beds during non-term time. Moreover,
several respondents indicated that they were involved in the student residence market as a result
of the location of their university. For example, for universities based in rural locations,
satisfying demand due to a lack of locally available housing was a key factor for providing
student accommodation, as was the provision of affordable accommodation in areas with high
private rental prices.
For those involved in the provision of student residences, 74% of universities owned and
operated their own residences, 26% were involved in DBFO contracts, 48% entered into
nomination agreements with third party providers, and 32% had left the provision of student
accommodation to the private sector (with only minor, e.g. referral, involvement with the
university).
Table 2 – Provision and financing of student residences
The table reports summary statistics on the provision and financing of student residences in the UK university
sector. Panel A examines how universities currently provide and finance student residences. Panel B examines
how universities are likely to provide and finance student residences over the next 5 years.
Panel A: How does your university currently provide and finance student
residences? Proportion of respondents
University owned and operated residence 74.24%
University fund construction of residence and then lease to a third party who
operates 3.03%
University grants head lease to SPV - who designs, builds, finances and operates
residence for a typical period of c40 years 25.76%
Third party provide residence and the university enters into nomination
agreements 48.48%
Third party directly lets student beds to the market with only minor (referral or
equivalent) or no involvement with the university 31.82%
Panel B: How is your university likely to provide and finance future student
residences over the next 5 years?
University owned and operated residence 50.00%
University fund construction of residence and lease to a third party who operates 6.06%
University grants head lease to SPV - who designs, builds finances and operates
residence for a typical period of c40 years 28.79%
Third party provide residence and the university enters into a nomination
agreement 40.91%
Third party directly lets student beds to the market with only minor (referral or
equivalent) or no involvement with the university 28.79%
No plans to grow the supply of student residences at present 24.24%
Respondents were asked what the perceived risks and benefits of the university owning and
operating their own student residences and/or outsourcing the provision to a third party. Table
3 outlines the pros and cons of each supply model of PBSA from the university perspective.
14Table 3 – Pros and cons of supply models of student residence
The table reports a summary of the pros and cons of each supply model of student residence as outlined
by our survey respondents.
University owned and operated University private-partnership Third-Party provider
Control of assets Preserves balance sheet for core activities Preserves balance sheet for core activities
Reliable source of significant rental income Generates a capital receipt No cost risk to university
Pros
Control of student experience Reduced cost risk Newer accommodation provision
Control over rental prices
Borrowing is on-balance sheet Complicated agreements No regular rental income or future capital receipt
Full cost risk Procurement can be difficult No control of student experience
Cons Diverts funding from teaching and research Reduced control of student experience No control over rental prices
Asset and operational management Reduced control over rental prices
Lack of regular rental income
Source: QMPF as amended by authors using survey responses.
On average (median), university owned and occupied residences offered 2,151 (1,725) student
beds, with an average occupancy rate of 93.66% and an average lease length of 42 weeks, but
the number of beds offered by universities ranged from 60 to 7,000, representing differences
in the size of universities (student numbers) and also the location of the universities. The
average (median) student beds offered by means of all other contracted provision including a
range of partnerships with third parties was 1,532 (735) beds.
Table 4 – Bed spaces
This table presents descriptive statistics on the number of and occupancy of bed spaces in the UK university sector.
Panel A examines how many student beds that universities are currently involved with. Panel B examines the
average occupancy rate of university owned and operated residences. Panel C examines how many student beds
universities plan to be involved with over the next 5 years.
Mean Median Min Max
Panel A: How many student beds is your university currently involved
with?
University owned and operated residencies: 2151 1725 60 7000
All other contracted provision including range of partnerships with third
parties: 1532 735 0 7020
Panel B: What is the average occupancy rate in university owned and
operated residencies? 93.66% 96.5% 60% 100%
Panel C: How many new bed spaces do you plan to provide or be
involved with over the next 5 years?
University owned and operated residencies: 516 300 3084
All other contracted provision including range of partnerships with third
parties: 906 300 8000
The nomination agreements that universities have entered into range from an academic year
(min 38 weeks) to 50 years. 62% of universities have nominations agreements with a tenure of
one year or less, whilst 54% have nomination agreements with a longer term tenure.
Universities appreciate the flexibility of short nomination agreements because of uncertainty
over demand levels from year to year, and the need to prioritise occupancy of university-owned
and operated residences for income generation purposes. Universities which have longer term
nomination agreements have such arrangements for a number of different reasons. Some
universities view a medium term nomination agreement as the correct balance for medium term
planning purposes, allowing them to balance certainty with flexibility, and one university opted
15for a longer term nomination agreement because of an undersupply of PBSA in their university
city. Others however, have longer term nomination agreements as a result of historical decision
making.
Respondents were asked about the type of accommodation that they offer. 78% of respondents
offered en-suite facilities and those who currently did not offer such facilities indicated that
any new university owned and operated bed spaces would include an en-suite bathroom
because this type of accommodation lets quickest. 70% of universities continued to offer shared
facilities (single bedroom, shared living space) but such accommodation was the hardest to let
and normally any un-let stock was shared accommodation where the university offered en-suite
accommodation. 42% of universities provided studio apartments. One university noted that
they offered twin rooms.
Table 5 – Type of accommodation
This table presents summary statistics of the type of accommodation provided by UK universities. Panel A
examines the type of accommodation that universities offer. Panel B examines which type of accommodation lets
quickest.
Panel A: In university owned and operated residences what type of
accommodation does your university provide? Proportion of respondents
En-suite 78.79%
Studio 42.42%
Shared 69.70%
Panel B: What type of accommodation lets quickest?
En-suite 81.48%
Studio 12.96%
Shared 5.56%
The second part of the survey asked respondents about their university’s future plans vis-à-vis
the provision of student residences. 50% of universities indicated that they would provide and
finance future residences on a university owned and operated basis, However, reflecting a move
from owner operated residences to private sector provision, the average amount of new bed
spaces that universities planned to provide themselves within the next 5 years (516) was almost
half of what they had planned to be provide in association with the private sector (906) over
the same time period. 29% of universities would pursue a DBFO arrangement, 41% would seek
to enter into new nomination agreements with private sector providers, and 29% had decided
to leave the provision of student residences entirely to the private sector. One-quarter of
universities had no plans to grow the supply of student residences either on an owner operated
basis or in involvement with a private sector provider at present. Respondents were asked if
sector changes had impacted their forward-looking student residence policies. The majority of
English universities noted that the removal of the student cap in numbers had driven an increase
in demand for student residences, but the majority of respondents stated that the introduction
of TEF had not impacted their residence policy.
In the final part of the survey we questioned the universities on the key drivers behind their
real estate strategy towards university owned student residences. From these outcomes we were
able to develop a new version of the Gibler and Lindholm (2012) model of the relationship of
corporate real estate strategies to core business strategy, which reflects the current strategy of
UK universities in the provision of student residences, and the most prominent Higher
Education sector risks over the last 5 years as outlined by PwC (2019). This new version of the
16model is shown in Figure 3.
Enhancing student wellbeing and satisfaction/improved student experience was the most
common strategy adopted by the respondents (79%), but income/revenue growth strategies
were also important. Therefore, we are able to make a distinction between two distinct
strategies for increasing the financial sustainability of universities: income/revenue growth and
student experience improvement. These strategies reflect the dual role of student residences as
an income generator and as a central part of the student experience and guardian of student
wellbeing. PwC (2019) state that financial sustainability (including pensions) and student
recruitment (linked to student experience) are in the top three Higher Education sector risks for
the years 2015 to 2019.
Applying these strategies for increasing the financial sustainability of universities to corporate
real estate strategies, we adapted the Gibler and Lindholm (2012) model to reflect the university
sector. 59% percent of respondents had used their student accommodation as a means of
reducing real estate related costs and as a strategy to increase the value of the university’s real
estate assets. Moreover, 39% of respondents used their student accommodation as a means of
promoting marketing, sales and organisational brand. The benefits of flexibility in providing
residences to students was also highlighted as an important tool to enable the university to
adjust to the changing demands and strategies.
Figure 3 - Revised model of relationship of corporate real estate strategies to core university strategies
in the UK.
(ii) Interviews with private sector providers
Four private sector providers of student accommodation were interviewed in mid-2019. In total
those interviewed currently offer 93,000 student beds out of the approximately 320,000 private
sector beds available in the UK. One of the providers also operated student beds overseas with
significant differences noted in the type of space required. For three of out of the four providers,
their focus was solely on the student let market while for the other provider, social housing was
the main focus, with student beds being a secondary activity.
17Four key themes emerged from our semi structured interviews with the providers of student
accommodation: portfolio of and location of residences; nomination agreements with
universities; lease length and type of student accommodation.
Portfolio of and location of residences
For each of the providers, growth in their student residence portfolio had occurred through both
new development and acquisition, with the last two years witnessing the sale of existing stock
to new operators. Interestingly, there was a polarised view on future growth prospects with two
of the providers anticipating strong growth, one moderate growth while the other believed that
the market for student accommodation was saturated in many cities in the UK and they had no
plans to expand their portfolio. All of the providers use UCAS application data as their key
indicator of demand, carefully noting shifts in the popularity of universities and courses.
Results in the TEF as well as the university’s own strategy documents and financial statements
are also included in the decision matrix to build new bed spaces, acquire existing stock or
disinvest.
For those that had grown their portfolio through acquisition, the choice of city or specific
location of the residence was not of their own making. However, those involved in developing
new space, implemented a bespoke strategy for each city, with proximity to the university high
on the agenda. None of those interviewed adopted a Russell group only city strategy, although
comment was made that operating within a Russell group city did reduce void risk which is
consistent with the growth rate of students in Russell group universities (20.2%) being
substantially greater than that of non-Russell group universities (9.4%) between 2012/13 and
2017/18 (HESA, 2019). That said, recent years have seen some non-Russell group universities
achieve higher growth rates than Russell group universities within individual cities. For
example, in the city of Manchester, the University of Salford achieved a student growth rate of
10.2% between 2012/13 and 2017/18, but in comparison the growth rate of students in the
University of Manchester was only 8.9% (HESA, 2019).
Locating in a city with multiple universities and possibly a further education college was seen
as particularly attractive due to high levels of demand and reduced operating costs per bed.
There was consensus that there was over-provision of bed spaces in certain locations which
reduced rental levels and increased the number of voids. This was caused by over development
of new space rather than necessarily poor performance of the university. This had resulted in
one provider, disinvesting from certain cities in 2018 and reinvesting elsewhere, in order to
move up the quality ladder.
Another important factor is the underlying real estate value of the cities that universities are
located. For example, should the demand for student accommodation in Brighton drop, the
underlying property value in Brighton is high, making it an attractive city for PBSA investment
and development as investors are confident that their investment can be re-purposed into flats.
Nomination agreements with universities
All of the providers entered into nomination agreements with the universities, with two of the
providers having approximately 60% of their stock held under agreements, while the other two
have less than 20%. The length of the nomination agreements were predominantly for one or
two years, although the range was from 1 to 25 years, with the length of the agreements
depending on the needs of the university and their strategy for their own stock. The longer
nomination agreements occur with universities both north and south of the border and not just
18in London where residential space is at a premium. Some of the nomination agreements have
void risk clauses, where the university covers any shortfall in occupancy, otherwise the
provider must try and fill any voids.
Lease length
Length of the letting contracts range from 44 to 51 weeks, depending on the location. For some
providers it is possible to let the beds in the summer months thus increasing the cash flow.
Examples including letting beds to visitors to London and to Edinburgh at the time of the
festival. Rental levels are variable between the cities reflecting supply and demand of the
student beds and the wider health of the local housing market and the availability and cost of
space in the houses in multiple occupancy (HMO) market.
Type of accommodation
The view was that the expectations of students is much higher than ever before, but whilst en-
suite accommodation tended to let the quickest, there was a need to offer a range of options,
including different configurations of space, size and levels of affordability. It was commented
that where a university had strong demand from international students there tended to be
differential levels of willingness to pay for accommodation, with the Chinese students being
more affluent than those from Africa and India and thus willing to pay more.
Other factors
The standard of university provided accommodation was generally perceived to be lower than
that provided by the private sector and generally regarded as not as good value for money. But
despite this, university provided accommodation continues to be popular, particularly for first
year students because of the benefits of the “wrap around care” and “on campus support” that
university provided residences can provide.
(iii) Interviews with bank lenders
Two active bank lenders to the student accommodation sector were interviewed in mid-2019.
Both banks agreed that student accommodation is currently viewed as an attractive sector, and
that the sector is likely to continue to provide plenty of opportunity in the long term. From a
lending perspective, it offers exposure to a liquid market, attractive to a wide range of domestic
and international investors, meaning value volatility is currently low. Moreover, for well-
located and managed schemes, student accommodation has the capacity to generate a stable
income profile on which debt repayment can be based. Four key themes emerged from our
interviews with the bank lenders: risk; university credit rating; nomination agreements; and
loan to value and debt yield.
Risk
Four major risks involved in lending to this sector are identified.
(i) Market risk: Recent years have seen a number of opportunities to develop new
schemes in cities where traditionally the student accommodation asset class did not
exist or was limited, but where currently there is significant university growth.
However, such cities too will have a natural limit and in locations approaching
capacity, lenders will limit their appetite to the best located schemes, operated by
established industry players. In the past one bank considered lending in Russell
19university cities only, but this is no longer the case. However, there are clearly
locations where banks would not lend due to either oversupply in the market or
where universities in those town or cities are struggling to reach their student
numbers.
(ii) Operational risk: Lenders are focused on whether the projected rental levels will be
achievable in the market and will assess the experience of the operator in the area
of the proposed student accommodation and whether their revenue / cost
assumptions are consistent with comparable schemes.
(iii) Repayment risk: Lenders need to consider whether the project can generate
sufficient net operating income to repay the debt and whether it is sufficient to repay
the debt in full over an agreed maximum term. A key issue that lenders are
concerned about is occupancy levels. Therefore, projected student lease lengths are
very important to a lender as cash flows are based on what the standard lease length
would be expected to be. In cities such as Edinburgh, lease lengths would be
expected to be 51 weeks because of the festival, but other towns with no summer
business would normally be evaluated on a 44 week let.
(iv) Construction/development risk: One lender indicated that construction and
development risk has become increasingly important. Lenders are increasingly
concerned about the developer’s track record and ability in delivering student
accommodation projects to the required specification and within budget.
(v) Brexit risk: Lenders have acknowledged the potential impact of Brexit on UK
student numbers when making lending decisions, specifically the level of
international students who will be coming to the UK to study given a large
proportion of these students are potential users of student accommodation which
may reduce demand.
University credit rating
One of the largest changes in lending practice in the higher education sector at present relates
to credit rating. Formerly, the difference between the very best university credit rating (for
example Oxford or Cambridge) and the very worst credit rating (for example a fairly new
university operating in a widening participation scheme or civic agenda) was negligible on
overall lending practice. Now the credit difference between the two is substantial, but it doesn’t
mean that the actual credit profile in the sector has worsened – indeed, at the top end it is
probably better as the shackles have been taken off to allow the best universities to grow home
and international student numbers.
Nomination agreements
Lenders indicate that the type of nomination agreement secured by providers of student
accommodation has an impact on how they fund developments. Hard nominations agreements
in the region of five years in length, help to reassure lenders as the guaranteed student rent
receivable enables the lender to repay the loan. Shorter term nomination agreements in the first
year of new student residence, also helps facilitate lending. Longer term lease partnerships
between a university and a third party provider tend to be funded more from the bond market
rather than from banks due to the tenure of these agreements.
20You can also read
